FSA defends its role over Lehman accounting

The head of the Financial Services Authority has defended the role of the
watchdog in dealing with the collapse of Lehman Brothers and its accounting by
saying to blame the FSA was to misunderstand the issue.

Chief executive Hector Sants is quoted in the Financial Times today
saying: “Any suggestion that this is an FSA supervisory failure reflects a
complete misunderstanding of the circumstances.”

His comments follow publication of a report last week by the US bankruptcy
examiner for Lehman which said the investment bank used accounting for so-called
Repo 105 transactions to obscure the true state of its balance sheet.

He is reported to have added: “The balance sheet effect referred to in the
Lehman report only occurred in the consolidated accounts which were prepared
under US GAAP.”

Repo transaction involve the short-term sale of assets to raise cash but the
assets remain on the balance sheet of the seller because the intention is always
to buy them back. The deals are very common but Lehman exploited a technicality
in US accounting rules so the transactions could temporarily remove risky assets
from its balance sheet. Up to $50bn of these Repo 105 transactions were
channeled through London.

The examiner’s report heavily criticised US auditors Ernst & Young but
earlier this week the UK firm was asked to provide information to accounting
watchdog the Financial Reporting Council about its work on auditing the bank.

Read more:

smoking gun leaves E&Y facing questions

administrators consider damning report

& Young “negligent” in Lehman audit, report claims

CFOs were warned of risk

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